Self-Employed Taxes in Ontario
Being self-employed as a sole-proprietor or part of a partnership would require you to record the business’s income and expenses, relative to your proportional ownership, toward your total income on your personal income tax return. The net income of your business sole proprietorship or partnership would then be taxed at your marginal personal tax rate for the year. This is because the Canada Revenue Agency (CRA) does not view you and your business as separate legal entities, being a sole proprietor. As a sole proprietor or member in a partnership, it is crucial to understand your tax filing obligations on your self-employed income in Ontario and how to pay your taxes owing.
This article aims to break down the necessary information on how to account for taxes when an individual is self-employed and meet your tax filing obligations in Ontario.
Filing for Sole-Proprietors
If you are self-employed as a sole proprietor, you must file your personal income tax return, subject to the same tax rates as an individual earning employment income. The business income reported subject to both federal and provincial tax rates at the marginal tax rates applicable at the specific time. Any expenses incurred to earn the self-employment income can be recorded as expenses against the income to calculate the final profit from your self-employment. The profit is deemed business income and is required to be reported on your tax return.
Filing for Partnerships
Partnerships are not required to file income tax on earnings or pay taxes at the partnership level if certain conditions are not met. If the partnership grows to a certain point it will have to file a partnership information return and issue slips to the partners. For our example we will assume that the partnership does not have to file a return and the income generated is split between the respective partners and filed on their individual personal income tax returns. Income, deductions, credits, and losses are divided between the partners based on the partnership agreement. There are special considerations in the year a partnership is dissolved.
Filing of Business Income using Form T2125
The business’s income, net of deductions, must be reported on the T2125 form for professional or business income. The form helps with the calculation of gross income needed to complete the personal tax return. Additionally, it provides a structure to deduct business expenses from the gross income amount listed to lower the taxable income. The details included in the form are the sources of the profit, business description, products and services description, business industry, income derived from business activities corresponding to the internet, Goods and Services Tax (GST) and Harmonized Sales Tax (HST) received and paid, and the expenses incurred concerning the income.
There are additional expense deductions when completing self-employed taxes in Ontario. These deductible expenses include wages and benefits, inventory, travelling, legal and accounting fees, cell phone fees, rent, leases, maintenance, bank charges, office supplies, advertising and more. Also, in the case where your work is being done from a home office space designated for the business operations, you can claim expenses for mortgage interest, rent, utilities, repairs and maintenance, property taxes, upgrades and more related to your home office workspace. Some individuals can claim their vehicle expenses if it is used for business purposes. These expenses include repairs and maintenance, payments for the lease, depreciation, parking, gas, cleanings, oil changes, registration fees and more. Note that the amount of deduction that can be claimed is related to the home office’s proportion and the vehicle used to generate revenue and carry out business operations. By the deduction of these expenses, income taxes are reduced, providing significant tax savings for self-employed individuals.
Contact SRJ Chartered Accountants to help ensure you are correctly calculating any expenses attributable to your business earnings to ensure you are not overpaying on your taxes.
Canadian Pension Plan and Employment Insurance Contributions
Unlike employment income, where your employer takes care of deducting and remitting contributions to the Canada Pension Plan (CPP) and Employment Insurance (EI) on your behalf, the onus is on you, as a self-employed individual, to keep calculate and remit the required tax and withholdings due for your income and contribute to the CPP or EI (which can be voluntary under certain conditions) programs.
Individuals between the ages of 18 to 70 and who earn a net income of greater than $3500 must contribute to the CPP. Employment income workers automatically have a percentage of their pay deducted for the Canadian Pension Plan, and their employer matches this amount. However, self-employed Canadians must contribute both a portion for the Canadian Pension Plan and another amount matching that would have otherwise been paid by the employer.
The self-employed income tax return deadline is extended to June 15 for the taxpayer and their spouse. However, any tax payable is due by April 30 of the following year. As such, it is highly recommended to complete your tax return by April 30 to ensure that your taxes are paid on time to prevent interest accumulating on the amount. If the CRA discovers that your tax instalment payments must be made for a subsequent year, they will inform you. The dates related to the installments are March 15, June 15, September 15, and December 15 of each year.
Preparing self-employed taxes in Ontario can be difficult at times, so it is suggested to contact a professional accountant to help you manage your business earnings and expenses easily and prepare your taxes relative to your specific business situation to maximize your tax savings.
1. How much should I set aside for taxes Canada self-employed?
You can use SimpleTax’s calculator to determine the average tax rate you need to pay and how much of your earnings you should set aside for your tax liability.
2. How do I file self-employment taxes in Canada?
Self-employment taxes are filed with your personal income tax return. The business’s income, net of deductions, must be reported on the T2125 form for professional or business income. The form helps with the calculation of gross income needed to complete the personal tax return.
3. Can I do my own taxes if self-employed?
You can do your own taxes if you have the necessary knowledge to complete your return comprehensively. However, it is recommended to consult with a professional to prepare your taxes relative to your specific business situation to maximize your tax savings.
4. How do I file taxes as a freelancer in Canada?
As freelancers work for themselves, ultimately they are self-employed. As such, they would file their taxes as self-employed individuals do. Self-employment taxes are filed with your personal income tax return. The business’s income, net of deductions, must be reported on the T2125 form for professional or business income. The form helps with the calculation of gross income needed to complete the personal tax return.